Factoring and Invoice Factoring

Factoring is a service that allows you to finance against debt balances you have outstanding on your ledger. The advantage of 'Factoring' your debt is that it provides a full sales ledger and collections service. This means the Factor has the responsibility for your sales ledger.

You can include protection against bad debts in your factoring service this is known as Non Recourse Factoring. So if one of your credit-approved customers does not pay a debt, which is not disputed, then your Factor will credit you with the amount of the debt.

Those deals, which are not protected, are referred to as Recourse Factoring so the debt and the risk remain with you so should the client fail to pay then the Factor will seek payment from you for the finance given on that account.

Some Factors refer to a term Approved Debts, what this means is debts which a Factor is willing to finance. This depends on which type of factoring you have chosen for your circumstances. In the case of Non Recourse Factoring these are customer debts within the limits set by the Factor; with Recourse Factoring this can be debts that are within generally set financing limits or on specific client accounts. Unapproved debts are debts, which are in dispute, or normally Recourse Debts, which are over 90 days old.

Debts are often the largest asset that companies have typically if sales are good there may be a lag in converting them to hard cash this can be up to 3 months in some industries. So why do you factor your debts, this has many advantages in helping growing your business it can aid your cash flow if you have slow paying clients, provide much needed working capital to expand your business. It can as described above offer real protection against bad debt losses.

Most contracts are set up on a percentage basis dependant on many variables usually the common percentage is 80/85%. The balance of the debts less charges are paid when the clients pay allowing flexibility which keeps pace with business growth, without the downside of parting with control or an equity stake in your business. Charges are also normally linked to turnover and dependent on the services provided such as collection, bad debt protection. They can normally vary between 0.50% to 3.0% of annual turnover. Rates also vary considerably from 0% to 5% above base rate depending on the factor. Finance that is provided before collection usually has a discount charge which is calculated on a daily basis on usage of funds, this is comparable in terms of cost with normal secured bank overdraft rates.

You may wish to end the contract as your circumstances have changed or you may wish to change Factors for a cheaper deal or greater flexibility. A word of advice before you enter into the contract read the terms and conditions carefully, contracts can vary on termination clauses, some are on a contract anniversary or an annual basis, others require three months notice at any time. To get out of the contract you are always required to repay the full amount to your factor. Commercial Mortgage Advice can help in this situation as there are companies who are hungry for your business, we can negotiate on your behalf to reduce or even in some cases eliminate these fees allowing you a better deal all round. So for all your factoring needs see Commercial Mortgage Advice, we can help.